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Payroll Tax

Payroll taxes is the percentage of an employee’s salary that is deducted from their wages to pay for the Federal Income tax, FICA and FUTA. The employer is responsible for paying both the employee and the employer portion of those taxes. Employers are required to collect and report all types of earnings including wages, tips, and other compensation (i.e.: car allowance, equipment reimbursement).

There are three main taxes paid and reported by the employer on a quarterly and annual basis:

  • The federal income tax

  • The Federal Insurance Contributions Act Tax

  • Federal Unemployment Tax Act (FUTA)

The federal income tax is calculated by the employer. It is a percentage of an employee’s wages and determined by the employee’s tax status as indicated in IRS Form W-4. The IRS requires that all employers issue a Form W-2 to employees every year by January 31st. This form provides employees with proof that the employer has paid federal, state, and local taxes based on their jurisdiction. The employer is required to send a copy to the IRS to confirm the form was issued to the employee. The employee uses the W-2 to file their annual income tax filing due on April 15th of every year. 

FICA taxes are calculated at a flat rate of 12.4% and are split between the employer and the employee. It consists of two parts: 

  • Social Security Tax: The current rate is 9.5% and has an earnings cap that fluctuates from year to year.

  • Medicare Tax: The current rate is 2.9% and doesn’t have an earnings cap.

The Unemployment tax (FUTA) is exclusively paid by the employer. It is a percentage of an employee’s wages and capped based on an employer’s industry. 

The IRS has hefty penalties for those employers who fail to file and report payroll taxes to the federal government. Penalties range between 2 to 10%. Furthermore, failure to issue and report a Form W-2 for each employee by the deadline will result in a $50 fee for each form missed.